Here Are The Best Ways To Save For A Down Payment
Buying a home – one of the most exciting events in your life, and, probably, the biggest investment you’ll ever make!
It’s also most likely the purchase you’ll be paying off for years in the form of a mortgage, so how much down payment you can offer can make a significant difference to how much your monthly payments will be.
There certainly are loans that require a small down payment; however, most banks are looking for closer to 20% down. This could mean that a homebuyer needs $80,000 or even more for a house that costs $400,000!
Now, how do you come up with thousands of dollars for a down payment if you already have financial responsibilities, such as rent, credit card or student loans, or car payments?
We’ve gathered some useful info on saving for a down payment – the smart way:
1.Get Prequalified For Your Target Amount
Before you start saving for a down payment, establish how much you’ll need to save.
A mortgage lender will let you know how much you can qualify for, based on your financial circumstances. A general rule of thumb is – your monthly home expense should not exceed 28% of your stable monthly income, and to get a realistic picture of how much you can afford when buying a house, add the down payment to this amount.
2. Determine Your Timeframe
When you plan on buying a house, among other factors, will determine how much you need to save per year, or per month – the shorter your timeframe is, the higher your annual savings goal will be.
As we already discussed, you can certainly put down less, but then you will likely be paying a higher rate, which means higher monthly payments and paying more overall during the life of your loan. Also, if you have any kind of credit issues, it may be a challenge to get a mortgage at all.
So, your best bet is to build your down payment nest egg.
Some financial planners recommend that if you’re planning on buying a home in 2 – 5 years out, you could look into investing your money in this manner: 50% in longer-term bond funds or individual bonds, 40% in short-term bonds that mature in 1-3 years and the remaining 10% in cash – keeping in mind that if interest rates go up after you buy a bond, its value decreases.
Another option is to invest in a certificate of deposit, or CD, if you agree to keep the money in the account for a longer period, or pay a penalty if you withdraw sooner. Your earnings would be more than from a savings account, but still relatively low – about 1.5% on a three-year CD.
Maybe a better way to improve the rate of return and to help mitigate any interest rate risks would be to invest the money in laddered bonds or CDs.
Now, if you plan to buy a home in a year or so, financial experts recommend the money should be kept completely liquid, so you can easily access it at any time.
The best way to go about that – place your money in a good old-fashioned savings account, the one with a higher yield.
3. Make Room In Your Budget
If you need to save thousands of dollars per year, you need to make some room in your budget – either by earning additional income, cutting back on expenses, or both.
Rent is likely taking up over 30% of the money you make, and maybe you can try to negotiate a better rate with your landlord, move to a cheaper location, or downsize. Depending on where you live, going from a 2-bedroom to a 1-bedroom place can lower your rent by 25 to 30%.
Or, consider having a roommate (or two) – sharing a home isn’t just for twenty-something; in fact, the percentage of adults living with someone other than a spouse or partner continues to rise.
Next, look at your expenses – not only will it help save you money for your down payment, but it will also prepare you for managing the tighter budget once you become a homeowner.
4. Set Up An Automated Savings Plan
Not many people save money by nature, and it’s always smart to automate the savings process. This can start with your payroll, so allocate a certain percentage or dollar amount to go directly into a savings or money market account dedicated for your down payment.
Start small, maybe cutting your income by 2%, and you may not even notice that it’s not in your paycheck. Ask your payroll department to set a fixed amount to automatically go from your paycheck into a designated savings account – and you won’t have the temptation and chance to spend the money for other purposes.
Another excellent way to save money for a down payment on a house is by banking any bonuses, wins, or extras, such as income-tax refunds, gifts, bonuses or large commission checks, or even money from the sale of personal assets.
One thing to remember is to make sure that you have an emergency fund, in case you need a major car repair, replacement of a car, medical expenses that cannot be covered, or other unforeseen expenses. Also, take into consideration all your predictable expenses.
The great thing is that such practices will also prepare you for homeownership, as once you buy your home, you’ll have predictable and unpredictable expenses and you’ll need to budget for them.
5. Gifts
If possible, would you consider asking your family, maybe even friends, to contribute to your down payment?
According to the National Association of Realtors, 27% of first-time buyers in 2013 received gift funds from a relative or friend to help make a down payment, and the number is up from previous years.
Here’s what the 2015 annual gift tax exclusion law says: any individual can gift any other individual $14,000 per year tax-free. For instance, each of your parents could give you 14K and 14K to your spouse, which totals $56,000 – that’s a significant amount, and may be more than you even need.
We hope that these tips can help you with planning on how to save for the down payment on your new home – happy house hunting!
The Levin Law Group’s real estate lawyers represent clients in all areas of New York, Long Island, Westchester county and upstate NY – trust our expertise and dedication to help you protect your rights and interests.
Get in touch with a real estate attorney today and learn more about how our legal services can help you.